The Big Green Buy

In the wake of the BP oil spill, some captains of industry have begun calling for government leadership to spur a clean-energy revolution. In June billionaire software mogul Bill Gates visited Washington and encouraged lawmakers to pony up public subsidies to triple clean-tech R&D funding from $5 billion to $16 billion annually. Gates explained to the Washington Post that much of what is touted as free-market innovation was born of government subsidies: "The Internet and the microprocessor, which were very fundamental to Microsoft being able to take the magic of software and having the PC explode, were among many of the elements that came through government research and development." And on his website Gates wrote, "When it comes to developing new sources of energy, and ways to store that energy, I believe the federal government needs to play a more active role than it does today."

Gates's acknowledgment of the need for government intervention is welcome, but he and many others are stuck on "innovation." The fixation on new "game-changing" technology is omnipresent. Think of the metaphors we use: a green Manhattan Project or a clean-tech Apollo Program. It recalls Tocqueville's observation that "the American lives in a land of wonders, in which everything around him is in constant movement, and every movement seems an advance. Consequently, in his mind the idea of newness is closely linked with that of improvement."

Yet according to clean-tech experts, innovation is now less important than rapid large-scale implementation. In other words, developing a clean-energy economy is not about new gadgets but rather about new policies.

An overemphasis on breakthrough inventions can obscure the fact that most of the energy technologies we need already exist. You know what they are: wind farms, concentrated solar power plants, geothermal and tidal power, all feeding an efficient smart grid that, in turn, powers electric vehicles and radically more energy-efficient buildings.

But the so-called "price gap" is holding back clean tech: it is too expensive, while fossil fuels are far too cheap. The simple fact is that capitalist economies will switch to clean energy on a large scale only when it is cheaper than fossil fuels. The fastest way to close the price gap is to build large clean-tech markets that allow for economies of scale. So, what is the fastest way to build those markets? More research grants? More tax credits? More clumsy pilot programs?

No. The fastest, simplest way to do it is to reorient government procurement away from fossil fuel energy, toward clean energy and technology—to use the government's vast spending power to create a market for green energy. After all, the government didn't just fund the invention of the microprocessor; it was also the first major consumer of the device.

Call it the Big Green Buy. The advantage of this strategy is that it is something Obama can do right now, without waiting for Congressional approval to act. As such, it amounts to a real test of his will to make progress in the fight against climate change.

Consider this: altogether federal, state and local government constitute more than 38 percent of our GDP. Allow that to sink in for a moment. The federal government will spend $3.6 trillion this year. In more concrete terms, Uncle Sam owns or leases more than 430,000 buildings (mostly large office buildings) and 650,000 vehicles. The federal government is the world's largest consumer of energy and vehicles, and the nation's largest greenhouse gas emitter. Add state and local government activity, and all those numbers grow by about a third again.

A redirection of government purchasing would create massive markets for clean power, electric vehicles and efficient buildings, as well as for more sustainably produced furniture, paper, cleaning supplies, uniforms, food and services. If government bought green, it would drive down marketplace prices sufficiently that the momentum toward green tech would become self-reinforcing and spread to the private sector.

The good news is that despite our sclerotic, largely right-wing Congress, government agencies are turning toward procurement as a means to jump-start clean tech and cut emissions.

Perhaps the most important move in this direction came in October 2009, when President Obama quietly signed Executive Order 13514, which directs all federal agencies to "increase energy efficiency; measure, report, and reduce their greenhouse gas emissions from direct and indirect activities; conserve and protect water resources through efficiency, reuse, and stormwater management; eliminate waste, recycle, and prevent pollution; leverage agency acquisitions to foster markets for sustainable technologies and environmentally preferable materials, products, and services; design, construct, maintain, and operate high performance sustainable buildings in sustainable locations."

The executive order also stipulates that federal agencies immediately start purchasing 95 percent through green certified programs and achieve a 28 percent greenhouse gas reduction by 2020. The stimulus package passed in 2009 included $32.7 billion for the Energy Department to tackle climate change, and some of that money is now being dispersed to business and federal agencies.

Already some federal agencies are installing energy management systems and new solar arrays in buildings, tapping landfills to burn methane and replacing older vehicles with plug-in hybrids and soon some all-electric vehicles. But it is the green procurement part of the executive order that is most interesting.

Government has tremendous latitude to leverage green procurement because it requires no new taxes, programs or spending, nor is it hostage to the holy grail of sixty votes in the Senate. It is simply a matter of changing how the government buys its energy, vehicles and services. Yes, in many cases clean tech costs more up front, but in most cases savings arrive soon afterward. And government—because of its size—is a market mover that has already shown it can leverage money-saving deals.

However, back on Planet America the asphalt transportation arteries are clogged with 250 million gasoline-powered vehicles sucking down an annual $200–$300 billion worth of fuel from more than 121,000 filling stations. Add to that the cost of heating and cooling buildings, jet travel, shipping, powering industry and the energy-gobbling servers and mainframes that are the Internet, and the US energy economy reaches a spectacular annual tab of $2–$3 trillion.

The clean-tech price gap is partly the result of old dirty tech's history of subsidies ($72.5 billion between 2002 and 2008), but it is also the result of the massive economies of scale that the fossil fuel industry enjoys. In other words, gas pumps and gasoline are cheaper when you buy in bulk.

Closely associated with the price gap is another concept, which clean-tech developers call the "valley of death." This is the time in a technology's life cycle when capital dries up, the time between a technology's initial invention and its successful application as a moneymaking commodity.

A report by Ernst & Young found that a typical technological innovation—like the flatscreen TV or the cellphone—costs about $20–$100 million to invent but about $1 billion to deploy at competitive prices. Between government subsidies and capital markets, there is often enough financing available to invent new gadgets or buy into a mature and profitable business. But there is a dearth of capital for new companies trying to cross that gap between victory in the lab and victory in the market.

Smith Electric Vehicles, of Kansas City, is one company that would benefit immensely if government started robust green procurement. Currently Smith, the US affiliate of a British firm that has been making electric delivery trucks for eighty years, turns out about twenty units a month. The vehicles—flatbeds, refrigerator trucks, basic box-style delivery trucks—all require components that Smith buys on the open market.